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Saturday, November 22, 2014

Hendry walks through the remainder of the macro economic world as he sees it in parts 2 and 3 of the interview below. He covers China in depth in part 3, discussing some trades he has in place in that country.

I discussed the psychology behind this interview earlier in the week, but in part 2 I found it fascinating that he even admits to no longer paying attention to asset valuations (price to earnings ratios, etc.)

Thursday, November 20, 2014

With crude at $75 a barrel, the price Goldman Sachs Group Inc. says will be the average in the first three months of next year, 19 U.S. shale regions are no longer profitable, according to data compiled by Bloomberg New Energy Finance.“Everybody is trying to put a very happy spin on their ability to weather $80 oil, but a lot of that is just smoke,” said Daniel Dicker, president of MercBloc Wealth Management Solutions with 25 years’ experience trading crude on the New York Mercantile Exchange. “The shale revolution doesn’t work at $80, period.”

To understand why shale becomes unprofitable at these prices I highly recommend taking the time to watch the shale oil chapter from the new crash course:

Hedge fund manager Hugh Hendry rocked the financial world last year when the long time bear announced he was throwing in the towel and turning mega-bullish on stocks. He decided he would chase assets knowing that they were extremely overpriced in economies that were extremely fragile with the simple understanding that central banks around the world would push markets higher.

This shift has been happening to hedge funds managers, institutional investors and individual investors around the world one by one over the past 5 years. In the video below Hendry provides an honest walk through of how difficult it was for him from 2010 through 2013 to do what he felt was the right fundamental thing for his client's money. He notes:

"I have to say when I look back in the last three years it feels as if the sun only rose each day to humiliate me after that point."

The interview is an encapsulation of the psychological transformation that has been taking place with investors during this central bank driven stock market rally. The smartest people in the world know the house of cards will one day crumble (Hendry made over 30% for his clients during the 2008 collapse), but they cannot withstand the psychological pain of watching the market move higher day after day, month after month.

Following his bullish mantra in 2013 Hendry found that he was still layering on too much protection for his clients against down turns and selling into danger when markets began to weaken. This, he has discovered, is a mistake he will not be making in the future.

When the markets turned down in October, he stayed 100% invested and purchased more into the decline. Any decline (or rise) should be met with as much buying power as possible. This mentality has taken hold of market participants around the world, specifically in U.S. stocks.

How do we know today's markets represent a manic euphoria completely removed from reality? Because Hendry is one of the brightest minds on the planet. Watching him cave to central bank pressure is like watching a captured soldier turn on his country after taking years of psychological abuse at the hands of his captors.

The economics and finance books I read follow a general blueprint with three sections you see repeated over and over:

1. A History Of Finance/Economics Surrounding The Topic
2. What Is Taking Place Now Surrounding The Topic
3. What Should Be Done By Policy Makers & Political Leaders Based On This Information

When I was a younger man I read part three of these books with excitement and hope surrounding the future. In my mind, economic and financial wisdom would find its way into the minds of those making macro policy decisions and the world would begin to move toward a better place.

Today when I finish sections one and two, which I always thoroughly enjoy and appreciate, I stop reading and move on to the next book. When I read finance/economics articles online every week I no longer spend time reading anything that has to do with what the author thinks should be done in the future.

Why?

It does not matter because the world is not going to change. I understand this sounds depressing, but it is just the reality of the world we have been given. Any time you spend discussing with people or reading about how things should be is a complete waste of your time. How do I know? I have seven years of archived articles now on this website and my early years were dedicated heavily to this topic.

Your time should be spent further developing your understanding of what is most likely to actually happen and learning how to best profit from that outcome to support your family and help grow the real economy with your personal financial success. Perhaps that can be through the development of business that creates jobs or re-investment into the global economy following the next major economic downturn.

I see the world today divided into roughly three parts:

1. (The 98%) Have no idea what is happening around them have no desire to learn
2. (The 1%) Understand what is happening and try to profit from it
3. (The other 1%) Understand what is happening, get angry, and try to think of ways to take action and "change the system"

Readers of this site fall into one of the 1% categories. Why should you not waste your time in category three? Obviously you are a smart person so you should quickly see that it is 99 to 1 against you. Following a major collapse people within the 98% will get angry for a brief period of time and try to figure out what happened. Then the government will come to the rescue with the next round of "bread and circuses" and they will go back into their zombie state.

I mention this because I caught myself this morning when I finished discussing Jim Grant's new book saying.....'"Perhaps we will finally realize after the next global financial crisis that the best way to stop bubbles is to not blow them up in the first place." Of course that is the correct course of future action, but who cares? It's never going to actually happen. If you find me talking about "what should be" please let me know, and I will do my best to quickly get back to a more important discussion surrounding "what will be."

There have been times throughout recent history when central banks have become like mythological gods due to their ability to step into financial markets and "save us" from any further pain.

A period of central bank worship occurred in the late 1990's following ten years of Greenspan intervention. Then it arrived again in the mid 2000's following seven years of larger scale Greenspan intervention, and it is now occurring again following seven more years of unprecedented Bernanke/Yellen intervention.

What is forgotten during times like this is the future consequence of such of actions. We experienced a collapse in 2000 and 2008, and the next hangover will be far more painful than what occurred in 2008; it is only a question of how long they can delay its arrival.

The economic policies central banks and political leaders follow today are based on the perceived "mistakes" that took place during the Great Depression of the 1930's. The firm belief among those making today's multi-trillion dollar policy decisions is that leaders during the 1930's did not do enough, which led to the unnecessary pain that occurred during that period.

There was a another depression in 1921, a forgotten depression, that is never mentioned or studied in the tomes of history. Jim Grant has written a new book titled "The Forgotten Depression" that I will definitely be reading over the coming holiday season. In it, he describes how leaders stepped away from the markets and allowed them to cleanse. It created a horrible recession that lasted a short period of time. Assets prices declined sharply and the malinvestment was removed from the system. With a firm foundation in place, the global economy then went on to have one its best decades of real growth in history.

He is asked in the brief interview below, "what would have happened if Bernanke did not step in to save the markets in 2008?" Of course, we will never know. However, we know that 7 years later the global economy is still in stagnation with high unemployment, falling wages, and a far higher cost of living. While the 1% have improved dramatically, the 99% have experienced a decline in living standards. Perhaps we will finally realize after the next global financial crisis that the best way to stop bubbles from bursting is to not blow them up in the first place.

Wednesday, November 19, 2014

Great chart from Bloomberg below providing a timeline of Chinese cities that are experiencing rising prices, no change or declines. You can see during the last dip in prices during early 2012 it was only some of the cities experiencing price declines while in the most recent data 69 of the 70 cities were in decline month over month.

This is obviously not good news for a Chinese economy that relies heavily on real estate development for growth or a global economy that relies heavily on exporting goods to China to feed that development.

Tuesday, November 18, 2014

QE is not a United States phenomenon and when new money is created in Japan and Europe it will spill over into other markets around the world. We live in a borderless financial system, which means you must look at what every player around the world is doing in concert, not just one of the actors.

“Even with the Fed changing course, in 2015 you’re going to get a $1.4 trillion increase in liquidity injections, which is about 40 percent more than what happened in 2014,” said Peter. “Liquidity into the global economy’s going up, not going down. The question is: where is that liquidity going to end up?”

Japan announced this morning they will be delaying their second sales tax hike by 18 months. This comes after a consumption tax hike in April, from 5 percent to 8 percent, put the economy back into recession for the third time since the financial crisis hit in 2008 (a recession is defined as two consecutive quarters of GDP declines):

Japan's real household income has been falling steadily:

While the current account and trade balance remain deeply in the red:

The yen has been in free fall since the upgraded QE program was announced this month:

If the yen continues to decline against major export competitors in Asia, there may soon be a policy response coming from leaders within those countries. Japan has let the world know they plan to take the early lead in the currency wars.

I read over the weekend that Japanese Prime Minister Shinzo Abe models his reflation drive on the monetary revolution the Bank of Japan experienced in 1932 when their leader at the time ordered the central bank to "go for broke." The bluff worked, and the economy was strengthening by 1934 after the yen was devalued against major trading partners.

Those that have studied history know other countries that have "gone for broke," such as Wiemar Germany in the early 1920's, were not so fortunate. There is a fine line that exists between currency devaluation and hyperinflation resting solely on the confidence of those holding the paper assets policy makers are purposely devaluing.

The fact that Abe's policy is structured around "going for broke" should make holders of financial assets denominated in yen very concerned he may eventually cross the point of no return.

"We should be careful to get out of an experience only the wisdom that is in it and stop there lest we be like the cat that sits down on a hot stove lid. She will never sit down on a hot stove lid again and but she will never sit down on a cold one either."

- Mark Twain

"It's waiting that helps you as an investor, and a lot of people just can't stand to wait."

- Charlie Munger

"Live as if you were to die tomorrow. Learn as if you were to live forever."

- Gandhi

"One of the best rules anybody can learn about investing is to do nothing, absolutely nothing, unless there is something to do. I just wait until there is money lying in the corner, and all I have to do is go over there and pick it up. I wait for a situation that is like the proverbial shooting fish in a barrel."

- Jim Rogers

"Capitalism without financial failure is not capitalism at all, but a kind of socialism for the rich."

- James Grant

"At this juncture, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained."

- Ben Bernanke, March 2007

"Everything that needs to be said has already been said. But since no one was listening, everything must be said again."

- Andre Gide

"When people are getting richer and richer but they're not actually producing anything, it can't end well."

- Louis CK

"In economics things take longer to happen than you think they will, and then they happen faster than you thought they could."

- Rudiger Dornbusch

"I don't write about what I know. I write to find out what I know."

- Patricia Hampl

"Chains of habit are too light to be felt until they are too heavy to be broken."

- Warren Buffett

"Everyone has a plan until they get punched in the mouth."

- Mike Tyson

"Interest on the debt grows without rain."

- Yiddish Proverb

"You can have comfort, or you can have value. You cannot have both."

- Jim Grant

"Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy only when others are fearful."

- Warren Buffett

"No very deep knowledge of economics is usually needed for grasping the immediate effects of a measure; but the task of economics is to foretell the remoter effects, and so to allow us to avoid such acts as attempt to remedy a present ill by sowing the seeds of a much greater ill for the future."

- Ludwig von Mises

"Men who can both be right and sit tight are uncommon."

- Jesse Livermore

There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.

-Ludwig von Mises

"Most investors think quality, as opposed to price, is the determinant of whether something's risky. But high quality assets can be risky, and low quality assets can be safe. It's just a matter of the price paid for them."

- Howard Marks

"Whenever you find yourself on the side of the majority, it is time to pause and reflect."

-Mark Twain

"None are more hopelessly enslaved than those that falsely believe they are free."

-Goethe

"The longer the markets disobey basic rules of valuation, the bigger the opportunity for good investors to reap the benefits. Value investing works precisely because markets become dysfunctional at times."

-John Coumarianos

Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.

-Sir John Templeton

"No very deep knowledge of economics is usually needed for grasping the immediate effects of a measure; but the task of economics is to foretell the remoter effects, and so to allow us to avoid such acts as attempt to remedy a present ill by sowing the seeds of a much greater ill for the future."

- Ludwig von Mises

"People only accept change in necessity and see necessity only in crisis."

-Jean Monnet

Requiring a central bank to print money to increase government's purchasing power invariably ignites a hyperinflationary firestorm. The result through history has been toppled governments and severe threats to societal stability.

- Alan Greenspan

"It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning."

- Henry Ford

"Do you want to sell sugared water for the rest of your life? Or do you want to come with me and change the world?"

-Steve Jobs

"I'd be a bum on the street with a tin cup if the markets were always efficient."

-Warren Buffett

"The market can stay irrational longer than the investor can stay solvent."

- Keynes

"While the government struggles to save one crumbling enterprise at the expense of the crumbling of another, it accelerates the process of juggling debts, switching losses, piling loans on loans, mortgaging the future and the future's future. As things grow worse, the government protects itself not by contracting this process, but by expanding it."

-Ayn Rand, 1974

"The test of a first-rate intelligence is the ability to hold two opposing ideas in mind at the same time and still retain the ability to function."

- F. Scott Fitzgerald

"All our life, so far as it has definite form, is but a mass of habits - practical, emotional, and intellectual - systemically organized for our weal or woe, and bearing us irresistibly toward our destiny, whatever the latter may be."

-William James

"Men it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one."

-Charles Mackay

The greatest enemy of knowledge is not ignorance, it is the illusion of knowledge.

- Stephen Hawkings

"Give me control of a nations money supply, and I care not who makes it's laws."

- Amschel Rothchild

Illusions commend themselves to us because they save us pain and allow us to enjoy pleasure instead. We must therefore accept it without complaint when they sometimes collide with a bit of reality against which they are dashed to pieces.

- Sigmund Freud

Many of life's failures are people who did not realize how close they were to success when they gave up.